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California repeals prohibition on use of alternative currencies
BlogLaw of the Level

From pet grooming services paid with currencies backed by aggregated gift cards to coffee shops in Palo Alto and San Francisco that accept digital currencies for a latte, many Californians are completing everyday transactions with digital currencies. Community currencies (such as currencies “created by members of a community in conjunction with merchants who agree to accept the alternative currency”[1]) are seeing some popularity in Sonoma County, Humboldt County, and other areas of Northern California. Many video games continue to facilitate in-game and other purchases using alternative currencies.

The payments and video game industries have recognized, however, that quite often law moves more slowly than technology. In support of continuing the proliferation of alternative currencies, California Assembly Bill 129 (the “Alternative Currencies Act”) became effective on January 1, 2015. The Alternative Currencies Act loosens existing prohibitions on use of currencies other than the lawful money of the United States by repealing Section 107 of California Corporations Code.[2]

In considering the Alternative Currencies Act, the legislature noted that, prior to the enactment of the bill, California “ha[d] a growing and innovative payments market, but [had] a stagnant regulatory regime.”[3] The legislative history provides:

This bill makes clarifying changes to current law to ensure that various forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments.[4]

Underlying the Alternative Currencies Act was the fact that Cal. Corp. Code § 107, initially traced back to California’s 1849 constitution, was intended to prohibit states and private entities from creating their own money.[5] According to the legislature, while the prohibitions helped legitimize the United States dollar during the early years of California’s statehood, the prohibitions, when read broadly, present the unintended consequence of illegalizing many alternative currency transactions that form the basis of modern payments ecosystems.[6]

The Alternative Currencies Act lends further legitimacy to the use of alternative currencies, such as digital currencies and community currencies, for transactions in California. One implication of the Alternative Currencies Act is that community currencies are legal for transactions in California. Advocacy groups have noted community currencies present advantages to specific businesses, including:

creating [specific] forms of exchange that:

keep wealth circulating locally,

allow local businesses and community members to continue exchanging essential goods and services,

promote community cohesion by re-grounding economic relationships in real human connections, and

are designed to solve specific social, environmental, and economic problems.[7]

Another implication of the Alternative Currencies Act is that transactions involving digital currencies are legal in California. Digital currencies specifically mentioned in the legislative history include the cryptocurrency Bitcoin as well as the digital currencies Ripple, Litecoin, Peercoin, Namecoin, Dogecoin, and Primecoin.[8] Legalization of transactions involving these currencies provides further legitimacy for the use of these currencies for various purposes, including in-game and other purchases in video games, or for the sale or exchange of goods or services.

Though the Alternative Currencies Act lends legitimacy to the use of alternative currencies, more legislative action needs to be taken and many in the payments and video game industries recognize there is still some uncertainty regarding alternative currencies. For example, the use of alternative currencies may be still regulated by federal entities or preempted by federal laws and regulations. Further, parties dealing in alternative currencies or acting as an exchange for or transmitter of an alternative currency, particularly one that permits anonymous transactions, may continue to face challenges in establishing banking relationships, funding and/or financing, and the uncertainties and expense of an evolving landscape for licensing and regulation.

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Compare jurisdictions: Corporate Governance

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